What’s the most difficult thing to do as an investor? Some say buying the right stock. Some say selling at the right time. Some say valuing companies. But to me, it’s sitting on my ass.
Many successful investors got wealthy by sitting on their ass. They include Warren Buffett and Charlie Munger and many of their disciples. It sounds simple, but why is it so difficult to do?
When Jeff Bezos met Warren Buffett, Bezos asked, “Warren, your investing strategy is so simple. Why doesn’t everyone just copy you?”
“Because nobody wants to get rich slow.” Buffett replied.
When you talk to some older people, one of the most common “regrets” is always “I would be 10x richer if I still hold that stock now from 10 years ago.”
Indeed, just two clicks away, in addition to ultra-low trading commission, getting in and out of a stock has never been easier. It is a good thing and also a bad thing. You can cash out easily, but sometimes too easily, driven by emotions.
The constantly changing stock price is the biggest root cause of all the emotions. One day you buy a stock and the other day you see a 10% pop in its price, you sell it to realize the nice quick profit, hoping to repeat it everyday and be the world’s richest person in a few years. The other day you buy a stock, you see a 10% pop some days later, followed by a 5% drop on the following day, and you regret not selling to realize the 10% gain. Then you sell it when it’s back to a 10% gain. The other day you buy a stock, you see a 10% plunge in price the next day, you panic and you sell it when it’s back to your break even point.
Sometimes you get in and out because of events, be them macro events and company-specific events. You read news headlines — wars, viruses, earthquakes, unemployment, etc. You worry about the economy and sell your stock. The company’s earnings trail expectations for a quarter, you think it will be the case in the next one and you sell your stock. A director of the company sell some of his shares and you follow him to sell your stock. And the list goes on. You have too many “good” reasons to sell your stock.
Psychologically, it’s difficult to convince yourself to buy back the stock at a higher price than that you previously sell at. A very typical case would be, you buy a stock at $10, sell at $13 for a nice 30% gain. It drops back to $11 quickly and you feel lucky to have gotten rid of it at the “right time” and plan to buy back at the originally cost at $10 and repeat the same 30% gain. The stock then rises to $15 in a few weeks, you start to get nervous but you don’t want to pay more than your exit price at $13. Then months later it surges to $20 and years later $100 or even $1,000.
The case applies to many investors in names like Apple, Google and Amazon. These companies have been around us for some time and many of us are their repeat customers but only few of us are able to sit through as investors, despite their greatness and the ability to thrive over multiple economic cycles.
Value investing is sound and effective, but what’s better than the “buy low sell high” value investing model? Charlie Munger presented the model of “Sit On Your Ass Investing” at the 2000 Berkshire Hathaway AGM.
You have value investing, and growth investing, but now we also have “sit on your ass investing”, which is better.
The problem with value investing is it requires too much work.
First you have to find an undervalued stock and buy it cheap. Then you have to sell it when it the price reaches or exceeds your calculated figure for its intrinsic value.
Because this requires many decisions over a long period of time, Charlie Munger prefers his own method in which all you have to do is pick a really great company when it is attractively priced, and then just sit on your ass. The great advantage being that it only requires one decision.
“If you buy a business just because it’s undervalued then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies then you can sit on your ass … that’s a good thing.” — Charlie Munger
Regrettably, I still have not mastered “sit on your ass investing” and I have not made big fortunes from it. But I am a believer and trying to be fully committed to it. I am sitting on some names that I expect to grow and age gracefully along with my children and hopefully also myself. Years or decades later, I hope I will still be sitting on my ass.
“Our favorite holding period is forever.” — Warren Buffett